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PwC and Kantar Retail are pleased to present Retailing 2020, a follow-up study to our original Retailing2015 report published in 2007. This 2020-focused document identifies and investigates some of theeconomic drivers that could shape the US retail landscape, as well as components of channel and shopper.This report also documents an intriguing, forward-looking dynamic as we move from the early 2010s andadvance toward the retail landscape of 2020. The current retail landscape has been recovering from theworst economic downturn in memory for most shoppers. At the same time, the US retail market continuesto evolve into what we term the Post-Modern market evolution phase, characterized by hyper-competition—both online and off—and signals an era defined by very challenging circumstances tounderstand and master. In short, the retailers and suppliers willing to ―up their game‖ will likely remainthe most viable in a rapidly changing, shopper-driven retail landscape.We anticipate that the 2020 retail landscape will be shaped by retailers leveraging increasingly complexoperational, financial, and brand models. Retailers and suppliers, we believe, will need to address andmanage the complexity and diversity of the ―retail realities‖ that make the market challenging. Speed oftechnological advancements, globalization, and ways to leverage information are some of the drivers thatmay lead to a more consumer-centric landscape.This new reality creates several critical implications for retailers and their trading partners. The marketforces that are expected to impact the retail industry are significant, but can be leveraged by retail leadersthat seek new growth opportunities.Our research suggests factors that retailers and suppliers should consider when deciding how to managethe complexity and diversity of retailing in 2020. This report lays out defining principles (elaboratedunder "the new efficiency‖ concept) that retail brands should recognize and address in order to solidifytheir place in the retail marketplace of tomorrow.This report represents a synthesis of a number of sources: interviews with Kantar Retail and PwCs seniorleadership and retail channel professionals, Kantar Retail ShopperScape® reports, PwCs 2012 GlobalMultichannel Survey, PwCs Experience Radar 2011: Insights for the US Retail Industry, governmentstatistics, analyst reports and other published materials. We are providing general information which is nosubstitute for consultation with professional advisors.We hope that you find this report informative and insightful, and we look forward to dialoguing with youabout your experiences, opportunities and strategies as we move forward into the retail world of 2020.Regards,Bryan Gildenberg, Sue McPartlinChief Knowledge Officer US Leader, Retail & Consumer IndustryKantar Retail PwCDavid Marcotte Lisa Feigen DugalSenior Vice President North American Advisory Leader, Retail & Consumer IndustryKantar Retail PwCPricewaterhouseCoopers LLP, 300 Madison Avenue, New York, New York 10017-6204T: (646) 471-3000, F: (813) 286-6000, www.pwc.com/usKantar Retail LLC, 245 First Street, Suite 1000, Cambridge, MA 02142T: (617) 588-4100, F: (614) 355-4059, www.kantarretail.comRetailing 2020: Winning in a polarized worldPwC/Kantar Retail

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Executive SummaryRetail 2020: Winning in a polarized worldBased upon updated research and the combined views of our retail industryprofessionals, following the previously issued Retailing 2015: New Frontiers, we believesuccessful retailers of 2020 will be those most likely to properly position themselves tomaster the highly dynamic marketplace in which they operate, a marketplace that willlikely be increasingly polarized. The polarization of 2020 is expected to manifest itself ina variety of ways: Channel fragmentation. The US landscape is expected to experience a significant increase in non-store retail. Successful brick-and-mortar formats will look markedly different from one another. Most major retail outlets will operate a multitude of physical footprints, all aimed at pleasing their target customer in a variety of shopping modes. In fact, these ―footprints‖ may not involve physical stores at all. Non-store retail‟s accelerated growth. According to Kantar Retails Global Database, by 2020, non-store retail is expected to account for 12% of the overall US retail marketplace for non-automotive goods. The concept of a ―wall-less‖, omnichannel retail world underpins many of the drivers, trends, and strategies that will evolve by 2020. Smaller footprints. The retail environment of the future will see retailers increasingly opening smaller stores to generate new growth as already seen in several urban markets such as the UK, and Mexico. The online world will capture an increasing share of planned shopping trips, leaving brick and mortar retailers to capitalize on immediate, or impulse, needs. Income fragmentation adaptation. The US is the most income-polarized developed economy in the world, according t0 US Census Bureau and Operation for Economic Co-operation & Development (OECD) data. This polarization will continue to drive success stories at both ends of the economic spectrum—increasingly catering to a wider income range. Growth of recession-trained and fixed-income shoppers. These groups, regardless of wealth, are expected to pursue increasingly polarized shopping decision processes. For categories these shoppers care deeply about, we expect a rise in premium products that are tailored to their specific needs, and in the ―indifference‖ categories, we expect a rise in the extreme value segment. The middle of the market will need to react with distinctive positioning to thrive.Retailing 2020: Winning in a polarized world Page 1PwC/Kantar Retail

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Drivers of change: A floor plan for the worldwithout wallsTechnology-enabling, consumer-centeredtransparencyThe ―wall-less‖ metaphor is one that has conceptual appeal for framing the 2020 retailmarketplace. More and more retail volume is expected to come from non-store-basedretail and stores will come under increased productivity and competitive pressures. Thepower of technology as a driver of change is not just limited to the shopper and retailenvironment. Increasingly, the ―world without walls‖ will also require a value chainwithout walls as shoppers gain more transparency into all aspects of the retail supplychain. Tracking technologies like Radio Frequency Identification (RFID) and otherinnovations will enable seamless checkout while providing shoppers the opportunity tounderstand everything from product origin to brand legitimacy at the touch of an icon ona handheld device. For the retailer, precise inventory level tracking, enabled bytechnology at all phases of the supply chain, will result in tighter management ofinventory to optimize cash flow.Polarization forces value and relevance to get personalThe polarization of the retail landscape, combined with increased consumer connectivity,will be reflected in key consumer drivers that will shape the flavor of this wall-less retailenvironment. More personalized and contextualized communication will change thenature of the retailer as expert. For instance, signage and service will be part of theequation, but unless retailers can apply that expertise to customized specifics about aparticular shopper‘s life, they may lose the opportunity to build loyalty. Retail brands willalso need to leverage the ―transparency in all actions performed‖ – and this visibility willrecast the nature of premium brands to be more transparent and authoritative. ―Big Data‖(large and complex sets of data that come from multiple sources) mining will enableretailers to also know a great amount about their shoppers, with insights that go wellbeyond their transactional behavior.Value will also become more personalized, where a retailers pricing dialogue with its bestshoppers will be centered on private conversations personally tailored to that customerspreferences. Additionally, multiculturalism will become an integral part of doing businessas more and more brands and conversations globalize.Globalization requires more nimble retail operating modelsGlobalization is another major category of key drivers expected to impact retaileroperating models. The global nature of the materials market makes nearly every businessa global enterprise, which, when combined with the continued growth in the developingworld, will put inflationary pressure on raw materials for retailers and shoppers. To meetthis challenge, retailers will need a supply chain that is networked globally, but that mightironically become more intensely local. The pressure for cash flow, combined with theneed for speed, will cause many retailers to consider sourcing closer to the point of finaldistribution rather than across an ocean.Retailing 2020: Winning in a polarized world Page 2PwC/Kantar Retail

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Driver manifestation: Where and how retailerswill sell and operateThe retail communitys reaction to these core change drivers will change the definition ofa successful retail model. These changes will come to life in the core areas where retailerssell, how they sell, and how they operate.Where retailers sellWe anticipate that globalization will push retail into a variety of new and different typesof markets. In addition to being successful at competing in different geographies, weexpect that the global learning platform will influence the types of stores retailers operate.Benchmarks of global formats will spread more rapidly, and retailers will adapt globalbest practices swiftly to meet the needs of their markets. Even local retailers will berequired to understand the global format portfolio in order to make sure they have astrong format strategy to compete in an increasingly polarized world.Polarization will also require physical stores to be more focused and aligned with theneeds of specific shoppers in distinct trading areas – further enabled by technology thataids personalized conversations for an even more customized and unique experience.Replenishment planned shopping trips will be automatic, particularly in low-engagementcategories and will be managed in a hands-off, online environment. Brick-and-mortarretailers will still be leveraged for immediate and acute needs and will need to be in closeproximity to shoppers to be successful. This will require more precise real estatemodeling and smaller physical footprints.How retailers sellTo enable more personal connections, retail brands will need to be well integrated acrossphysical, digital, and media touch points in order to realize the full range of opportunity.Retailers will weave manufacturer brand themes and resonance into their brands to tellbranding stories more effectively and their reach will continue to expand beyond sellingproducts to services and lifestyle solutions. This branding will be aimed at positioning theretailer as a ―one-stop life shop". The need to scale personal connections will pushretailers into customization techniques that will allow personalization of clusterableopportunities.How retailers operateConsumer-centric stores and relationships will require a like-minded consumer-centricsupply chain and operating model. Active consumer interaction in the supply chain willcause a divergence of shoppers. Some shoppers will pay significantly more for specificingredients, faster delivery, sustainable attributes, or higher product quality. On the otherhand, some will trade down to lower cost products with none of those features. Retailerswill need to understand where they sit on that continuum and how many consumer-centric opportunities they will need to leverage.Shoppers will also aggregate buying power into buying groups, and retailers may haveentire departments dedicated to managing consumer buying groups. Such groups will beable to employ short-term promotions for purchase advantage or resale – creating aworld where retailers may, in essence, morph into wholesalers and remain conventionalretailers to individuals. All of these transitions are expected to put intense pressure onretail economic models, particularly in the mission to drive square footage and assetproductivity.Retailing 2020: Winning in a polarized world Page 3PwC/Kantar Retail

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Strategic implications: The paradoxicalchoicesThe 2020 retail landscape may represent one of the more complex environments retailersand their trading partners have ever faced. Retail organizations that do not change whereand how they sell and operate will fail to adapt and succeed in this challenging landscape.The drivers and key trends weve outlined lead to core strategic choices for retailers,perhaps best described as "paradoxes": the paradox of where I operate, who I sell to, whatI know, and how I work.The paradox of where I operate: Am I global or local?Brick-and-mortar retail operators, we anticipate, will be under pressure to balancelocalization and personalization in an increasingly global world. In order to make sense ofthis complexity, retailers will need to build distinctive skill sets in dynamic clustering – toaggregate similar opportunities that might not be alike in obvious ways and to bring thoseopportunities to life. From a global perspective, retailers will continue to search for abalance between global skill sets that can be applied everywhere and a need to adapt tothe local market. In particular, we expect that parallels will be drawn between segmentsof geographically disparate markets and that global retailers will establish tradingecosystems made up of distinctly different country segments that have significant pointsof commonality.As global buyers, retailers will need to increase their ability to partner with their globaltrading partners to understand the world and capitalize on opportunity, as opposed tosimply trying to leverage scale for lower acquisition costs.The paradox of who I sell to: Am I a standard brand ora series of personal relationships?The importance of retail brands in helping shoppers simplify their lives will likelycontinue to be crucial, but in 2020, the brand will be less standard and more tailored tothe specific customer. Touch points will be more complex and require proficientintegration. The key to bringing this all together is a retailer‘s conversational marketingskills. Leading retailers will be classified by those that are the best conversationalists ―good at listening to their shoppers needs, along with communicating a secure and self-confident image to their consumers. This conversational prowess will also help retailersleverage other best-in-class brands they sell to build their equity.The paradox of what I know: Is data an advantage ora risk?Data mining skills, we believe, will be very important to retailers in order to understandand anticipate the needs of their shoppers. In fact, total value chain management will be acompetency set that distinguishes leading retailers from the norm. Retailers will notmerely use their transactional and point-of-sale data, but will be able to integrate thisinformation with other external data sources to tell more engaging stories. Transactiondata must be translated into compelling stories, even in large scale operating models(employing tens of thousands of associates). Data architecture plays a major role in thisability to tell stories: great retailers will be able to dynamically link disparate data sourcesto tell the right story at the right time.Retailing 2020: Winning in a polarized world Page 4PwC/Kantar Retail

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Data presents significant risks as well. Data security could become either a much largerbusiness risk or a regulated part of the retail landscape. Some shoppers may opt to be ―offthe grid‖ and require a very different, less technologically-driven relationship. Retailersmay decide the risk is not worth the return and may outsource significant aspects of datamanagement to experts, possibly other retailers.The paradox of how I work: Efficiency versus effectivenessRetailers, because they are more operationally-oriented, tend to be far better at efficiencythan effectiveness. By 2020, the leading retailers will be those who best blendeffectiveness into efficiency – yielding a concept that we call ―the new efficiency". Thenew efficiency can be viewed as having the following four components:1. The ability to realize and quantify opportunity as opposed to simply seeing the hard costs associated with change.2. The need to understand lowest potential cost and understand how costs might be lower if the work were required to be different because the landscape has changed.3. A holistic understanding of total value chain productivity.4. The ability to stop doing unproductive work and reimagine new ways to execute.Understanding these paradoxes and the interplay with the key drivers of change will spurretailers to devise new ways of working as shoppers needs change, and the demands forservice in an omnichannel world grow ever more acute. The following sections of thisreport shed light on these and many other relevant opportunities that are critical asbusinesses position themselves for success in 2020 ― in what we expect to be a verychallenging retail world.Retailing 2020: Winning in a polarized world Page 5PwC/Kantar Retail

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OverviewThis chapter investigates current US market conditions that could shape the retaillandscape through 2020: Retail industry overview: Transition from Maturation to Post-Modern market Consumer behavior overview: Post-recession consumer behavior changesRetail industry overview:Transition from Maturation to Post-Modern marketThe US retail industry is currently considered as being in the Maturation stage ascompared to other countries‘ retail sectors and is rapidly progressing toward the Post-Modern retail evolutionary stage, according to Kantar Retail‘s Retail Market EvolutionModel (Fig. 1). In the Maturation stage, the US retail market continues to concentrate andto be reduced to fewer companies, some major retailers fail and, in parallel, available realestate saturates the market. Further, Supercenter formats (Hyper/Mass Channel) capturea disproportionate share of all US retail.As the retail industry evolves toward the Post-Modern period, the end of Supercentergrowth will be a key change in the retail landscape both for retailers and suppliers. Theretail industry will also experience the proliferation of small, urban, ―alternative‖ retailformats, as well as reliance on multi-format portfolios to capture future growth. This willlikely compound the dismantling of mass homogenization and scale assumptions thatpropelled two decades of US retail growth and that has resulted in a highly fragmentedretail landscape for shoppers.By 2020, the US retail industry will have entered the Post-Modern retail evolution phase,joining the likes of Germany and the UK, whereby retail is characterized by high levels ofchain competition and a slow pace of growth among major chains. Post-modern retailingwill also bring limited square footage growth, increase the pressure on existing space tobe productive, and heighten retailer investment in independent capabilities (e.g., privatebrands, direct to consumer advertising and marketing). As a result, large chain retailgrowth through the decade is anticipated to remain very close to the early 2010srecessionary rate, with about one-third of large chain growth coming from online sales.Retailing 2020: Winning in a polarized world Page 6PwC/Kantar Retail

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Figure 1: Retail Market Evolution Model Nascent State Exploration Concentration Penetration Maturation Post-Modern CONCENTRATION: 2010 Top 3 Retailers Share of All Types of Retail 26% Chile 24% France 22% South Af rica Germany UK 20% Canada Argentina 18% 16% Mexico Brazil 14% USA 12% 10% KSA Italy 8% Turkey Japan 6% China 4% Chile concentration is 35% (of f top part 2% Russia of chart) India 0% -5% 5% 15% 25% 35% 45% 55% 65% 75% -2% 2010 Large-Scale Chain Retail Share of Total Market (Formal and Informal Markets Combined, All Format Types) -4% By 2020, the US retail market will have entered the Post-Modern retail evolution phase, joining the likes of Germany and the UK, whereby retail is characterized by growth fragmentation and the proliferation of small, urban, ―alternative‖ retail formats.Source: Kantar Retail Analysis, 2012Where will retailers find future growth?The outlook for retail channel growth is diverse. There will be no single channel orretailer that will dominate growth in the forecast period (2010E-2020E (Fig. 2)). Aportion of the growth that was attributed to Supercenters in the Maturation period willspill into the Discounter channel, which has benefited in the past few years from theeconomic downturn and the resulting increase in value shopping. We project that theDiscounter channel will continue to grow in the Post-Modern period similar to pastSupercenter growth.Retailing 2020: Winning in a polarized world Page 7PwC/Kantar Retail

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These generational differences will become even more apparent as the US demographicpicture progresses into polarization or demographic fragmentation over the next decade(Fig. 6). This polarization will create, in effect, two mega-cohorts—the ―over-50‘s‖ and―under-30‘s‖—dividing the US into two very different ―shopping nations‖.Figure 6: Generation Share of Population Share of population by generation (age in 2020) 13% Seniors (75+) 7% - 10 pts In 2020, ongoing Boomers (56 -74) 25% demographic 21% fragmentation will create two distinct 23% Gen X (39 -55) cultural, societal, and ―retail 21% 29% reference‖ groups. Gen Y (18 -34) 28% +13 pts 11% Emerging (<18) 25% 2020 Share 2012 ShareSource: Kantar Retail Analysis, 2012US income fragmentation continues: Growth of the“Haves” and the “Have Nots”In addition to the differences between demographical generational cohorts, the future USretail landscape will also be driven by income polarization. The US is the only majordeveloped economy in the world where income classes define retail channel dynamics –its distribution of income looks more like a developing economy than a developed one.We expect this difference to continue through the decade, and to have adisproportionately large impact on the development of the US retail marketplace. Thisimpact is most noticeable in three areas:1. “Masstige” retail – A combination of Mass and Prestige, "Masstige" is retail with a mid-market positioning, but aimed at the higher end of the mid-market. This area will continue to thrive when well executed. In many countries, the sheer size of the upper middle class is too small for standalone retailers to serve this need, but the US presents a massive platform for this positioning to grow.2. Discounters – Channel projections reflect aggressive growth in this area, much of this coming from continued conversion by low-income shoppers to the trade class best designed to help stretch their available cash from pay event to pay event.3. Ultra-premium – The very top end of the US marketplace will continue to be an attractive market for both US-based retailers and global operators using technology to reach these shoppers wherever they are located.Retailing 2020: Winning in a polarized world Page 11PwC/Kantar Retail

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Income fragmentation: Impact on economic recoveryof retail channelsKantar Retail defines ‗Haves‘ as those who are more likely to have bounced back from theeconomic downturn due to professional qualifications, education, and are likely to be inhigher income brackets. By the same definition, ‗Have Nots‘ are defined as thosehouseholds that are significantly disadvantaged economically to bounce back from theeconomic downturn due to jobs held and lost, primarily in the manufacturing sector, andbecause many did not have a four year degree, they have found it tougher to recover fromthis recession than past recessions.By 2014, we project that the ―Haves‖ will see the most immediate return to economicgrowth and the ―Have Nots" are likely to remain a core challenge for retailers andsuppliers. Despite starting to benefit from an improving job market, the ―Have Nots‖ willcontinue to display higher sensitivity to economic pressures (e.g., lack of disposableincome or job-loss insecurities) compared to other income groups in the US (Fig. 7).Furthermore, the grocery saving habits adopted by middle class families during theeconomic downturn will likely impact their future shopping patterns as well.The breakout of households into ―Haves‖ and ―Have Nots‖ is a qualitative benchmark, byKantar Retail, based on income and poverty data published by the US Census Bureau andeducation and unemployment data from US government agencies.Figure 7: “Haves” vs. “Have Nots” “Have Nots” $ “Haves” ~75% of income Channels Skew Channels Balanced Between Channels Skew > $62,000 Per Year Household Income Down-Market “Haves” & “Have Nots” Up-Market Limited Supercenters Home Book/ Sporting Upscale Assortment Traditional Goods Department Convenience Improvement Music Grocers Pet Supply Department Stores Stores Stores Stores Stores Retailers Apparel Stores Health/Natural Specialty Warehouse Toy Supermarkets Conventional Discount Dept / Stores Clubs Stores Supermarkets Mass Merch. Softgoods Value Dollar Drug Department Consumer Channels Stores Stores Online Stores Electronics Specialty Shoppers` Homegoods Stores Food / Channels Neighborhood Market FDM Channels Income changes the way Americans shop. The US has a unique distribution of income among developed economies that leads to unique positions by retail channel.Source: Kantar Retail Analysis, Kantar Retail ShopperScape® , and US Census BureauRetailing 2020: Winning in a polarized world Page 12PwC/Kantar Retail

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Based on US Census Bureau data and Kantar Retail estimates, by 2020, we expectdemographics and income gaps between the shopper segments to widen (Fig. 7 & 10),creating shopper segments with different expectations for product offerings and shoppingexperiences. As a result, leading retailers will have to rethink their scalable ―one size fitsall‖ approach. Any retail strategy must include a plan to fit the ever-diverging needs of theUS shopper, including both the ―Haves‖ and ―Have Nots‖. For example, we have alreadywitnessed retailers starting to diversify their format portfolios (e.g., testing urban or smallfootprint formats) and this ―niche‖ trend will accelerate in the coming years.Retailing 2020: Winning in a polarized world Page 13PwC/Kantar Retail

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Key change driversThis section explores a variety of underlying assumptions that will help drive the 2020 USretail industry outlook. Key US retail landscape change drivers include: Speed of technological changes Shifts in US demographics and shopper behavior Ripple effects of the changing global shopper Global economics of procurement Transparency and knowledge-centric shopping Challenges to retailer economic modelsSpeed of technological changesThe speed and pace of technological advancement have increased radically in the past fewdecades with internet and digital communications making the innovation ―ecosystem‖considerably smaller, faster, and more varied. By 2020, the pace of technologicalinnovation will have accelerated even more and mastery of new technology platforms willdefine the retail winners of tomorrow. It is difficult to forecast the exact nature of thistechnology, but it will likely revolve around three major business needs:1. Deeper understanding of the data available on individuals to provide a detailed view of behavior and to make predictions ("Big Data")2. More granular comprehension of product movement to meet regulations, reduce costs, increase safety, and mitigate loss3. Perpetual connectivity and communication manifested by the rise of internet penetration, smart devices, and social mediaDeeper understanding of the data available onindividuals ― known as “Big Data”A relatively new concept, Big Data can be loosely defined as large and complex sets ofdata that come from multiple sources. Some of these data sets are collected for a specificpurpose, and some are collected as a result of the individual‘s passing through the wiredworld. Combined, this data provides a detailed view of behavior and predictive indicators.Access to Big Data, and the ability to synergistically use the information to makeinformed and actionable decisions, will become a norm for retailers and suppliers by2020, based on the expanding use of data today.For instance, by 2020, we anticipate that retailers‘ analysis will pull from the following―common‖ sources of data: Information automatically generated by internalized elements embedded into cars, smart devices, home goods, and medical appliances.Retailing 2020: Winning in a polarized world Page 14PwC/Kantar Retail

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Consumer/shopper intentions, either through a verbal command or unintentional signals, such as body chemical analysis or household product inventory status changes.Big Data will create a vast pool of data that can be analyzed for patterns. These patternscan be turned into insights and used to create consumer demand, shopping cues, orretailer assortment maps. The patterns can also be used to minimize risk. For example,quick, automated pattern recognition around complaints due to a product failure will bedetected, tracked, and fixed in a much timelier manner than what is typical today.Ongoing business intelligence improvements will bring about a higher degree ofanticipation for consumers and system owners, setting a higher expectation for what‘s―standard‖ by 2020. For example, as mapping and driver assistance become standard,sitting in the driver‘s seat of an average car will cause elements to be shaped to a user‘sknown preferences, from the wheel, seat, mirrors, internal atmosphere, andentertainment (―infotainment‖). Production lines will have access to the same sources ofinformation, setting production based on global demand and profit modeling of retailersales data. In short, the ability to mine Big Data will be an enabler for the standardizationof this type of sophistication.Overall, retailers will have the opportunity to store and manage massive data sets derivedfrom point of sale, supply chain, and consumer input via loyalty cards or social mediainteractions. The ability to provide this level of analytical insight and to use it to manageall other parts of the business, including the shopper, will, we anticipate, determine whichretailers will thrive and succeed through 2020.More granular comprehension of product movementToday, tracking product movement is represented by Radio Frequency Identification(RFID). RFID technology, available for well over a decade, has been seeking a properbusiness case and a scalable application. The concept of relying on a tiny chip to containall moments of change, and reading that data in real-time had immense potential toreduce costs, increase safety, and mitigate loss. Though RFID works for trackingcontainers and pallets with proximity to power supplies, it does not work well at theindividual product or item level. For RFID to work at product level, the question of powersupply must be solved.In the future, products will be tracked and recorded throughout the entire supply chain,from commodity source through manufacturing and quality assurance and into shoppers‘homes.As RFID technology becomes more prevalent, its use will influence everything fromsupply chain management to retail checkout/payment. The need to track products in the supply chain will intensify due to regulation in certain areas (e.g., pharmacy and food safety for products such as infant formula). Traceability of the perishable supply chain will also be a major factor from a shopper level with RFID as a possible solution in this area. For retail checkout, both payment and product scanning will take place with far less human or machine intervention, changing everything from a retailer‘s labor model (checkout personnel will become discretionary) to its merchandising strategy (determining how to create virtual points of interruption to drive impulse without a logical stop at checkout).Retailing 2020: Winning in a polarized world Page 15PwC/Kantar Retail

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Given these benefits and the changing landscape, tracking tools will likely be embeddedin most products and consumer smart devices by 2020.Perpetual connectivity and communicationConsumer electronic devices have evolved from occasional-use devices to highlyembedded tools in our everyday lives. According to a 2011 Nielsen report, approximately46% of all mobile phone users own a smart phone. Smart phones will become even moreenmeshed in daily lives, becoming more efficient and easier to use, and will also providegreater functionality and require less power. Focusing on increased battery efficiency andalternative power supplies, the ability to store and use power over long periods of timewill be a key variable that we anticipate will be resolved by 2020 based on currenttechnologies under development. Ongoing user interface improvements will make theshopper‘s connection to the wired world increasingly seamless and effortless. Effectiveleverage of smart devices, specifically prompting users to engage at retail, we believe, willbecome an everyday reality for the retail industry of 2020.In the context of this perpetual connectivity, we project a host of potential applicationswill emerge within retail that can fundamentally reshape the classic ―4Ps‖ of retailmarketing:1. Product merchandising at the shelf will be more interactive for the shopper.2. Packaging will actively show products in use or communicate directly to smart devices.3. Pricing will be a fluid dynamic between the price initially offered, the interaction with the consumer, and the ―final price‖ based on rewards or special deals offered to the individual to close the sale.4. Promotions will be triggered by a shopper‘s physical presence, personalized and tailored to the shopper.Social media, a powerful enabler for consumer engagement, provides exposure to onlinecoupons, group deals, and promotion information. By 2020, the next generation of socialmedia will force merchandising and marketing into a ―group activity‖ both online and in-store (e.g., ―likes‖ associated with products, at the shelf level in its stores). In the future,expect shelf tags with ratings that change as shoppers review and purchase, as well asusage suggestions derived from social media groups providing product information at thestore. All of this activity may be enabled via electronic content in fixture, on the floor, oreven in mid-air though hologram technology (Fig. 8).Retailing 2020: Winning in a polarized world Page 16PwC/Kantar Retail

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Figure 8: New Applications for Shopping Companies are looking at hologram technology patents for future use on smartphones and tablets.Technology can generate an image above the screen of a 3D page for shopping.Shifts in US demographics and shopperbehaviorIn the coming decade, we anticipate that the US will witness an even stronger polarizationof income, age, and other demographic brackets, based on current trends and US CensusBureau projections. These factors will drive a higher awareness of not only what ispossible, but what‘s expected by consumers and this will accelerate the demand for adifferent type of retail model in 2020.Diverse demographicsThe generations of Hispanic and Asian immigrant children born during the late 1990sand early 2000s will be grown adults by 2025 and will constitute 25% of the USpopulation (Fig. 9). With this increase will come a shift in American culture as keyelements of their heritage (e.g., music, food, language and literature, celebrations andholiday traditions) become part of their shopping experience. Simultaneously, those over65 will make up a large part of the population, but they will likely want to ―preserve‖ whatis familiar to them and retain their existing culture.Given the birth-rate demographics, the population under age 35 will be markedly morediverse and open to multicultural marketing. Today, Hispanic merchandising has beenprevalent largely in stores where the demographic enabled it. In 2020, for retailers andcategories aimed at young families, multicultural marketing will be the norm―not anancillary capability. The need for nuance in communications as well as a balancedmarketing and merchandising approach will be critical, especially for those retailers whocourt the general population, not limited or niche audiences.Retailing 2020: Winning in a polarized world Page 17PwC/Kantar Retail

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Figure 9: Percent of Population by Race 76% 72% 1990 2000 2025 2050 62% 53% 23% 14% 16% 17% 13% 11% 12% 10% 8% 9% 3% 4% 1% 1% 1% 1% White non-Hispanic Black American Asian and Pacific Hispanic Origin (of Indian/Aleut Islander any race) By 2050, 53% (compared with 76% in 1990) of the population will be White, non- Hispanic according to the US Census Bureau. Given the increase of smaller families, a higher percentage of that population will be over age 65.Source: US Census Bureau, Population Division 2011Income disparityOver the past 30 years, the number of middle income families in the US has declined,resulting in a widening gap between high and low-income segments (Fig. 10). Needs ofthe low-income population will be met by the increased penetration and transparency ofthe internet but will be constrained by a lack of disposable income. As portablebroadband access becomes ubiquitous and affordable, we anticipate low-income familieswill use mobile shopping applications as a critical component of family budgetmanagement. In contrast, high-income households will be more concerned aboutmanaging time and convenience, optimizing the procurement of what they want, whenthey want it, with price playing a diminishing role.As mentioned previously, the fastest growing US brick-and-mortar retail channel isDiscounters, a format designed to meet the needs of low-income shoppers who generallylive pay check to paycheck. As the price value of convenience intensifies, we expect high-income, tech-enabled, affluent shoppers to seek out Discounters for price value as low-income shoppers seek out Discounters as a necessity.Retailing 2020: Winning in a polarized world Page 18PwC/Kantar Retail

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Figure 10: Income Divergence Splits the US - Middle Income Families 73% 74% 75% 69% 71% 68% 32% 31% 29% 27% 26% 25% 1970 1980 1990 2000 2010 2020FC 1970 1980 1990 2000 2010 2020FC The movement of wealth away from lower income US households (on the left) toward higher income households (on the right) is expected to continue. This also means that the "middle" is squeezed in multiple ways.Sources: US Department of Commerce, Kantar Retail AnalysisThe polarized value-centric, premium-seeking shopperBeyond income and generational differences, the recent recession has changed the wayshoppers perceive value. The meaning of value has also become divergent for thepremium shopper who is becoming increasingly frugal in certain instances, while at thesame time seeking premium for products and categories they care deeply about.Technology is further enabling this frugality and search for value. In most cases, affluentshoppers trade value sensitivity for time: their time is more valuable to them than a fewpennies saved on their weekly grocery bill. In the future, digital price managementapplications will remove this time barrier, driving pragmatic frugality through mostroutine purchasing, regardless of income.At the same time, well also see an emergence of the "new premium". Shoppers will haveboth the opportunity and desire to pay more for products that meet their needs morespecifically. Though this will be more extreme among the affluent population, youngershoppers are increasingly treating certain categories (particularly tech-enabled ones) as―needs", not ―wants", and are paying premium prices for them.Internet-enabled shoppers, in particular, will be able to more clearly define and findspecific products to meet their needs. We believe that shoppers will pay a premium forproducts or services that reflect their values, or for products that accomplish very specificthings. In particular, this ―new premium‖ will be defined by three core attributes: Transparency – Access to information will allow shoppers to know what brands stand for, and this visibility will be essential to brands positioning themselves as ―authentic‖ in the broad marketplace. Preservation – Although shoppers will increasingly become concerned about preserving the world, they will also spend significant and increased amounts on preserving themselves. Health and wellness will continue to be a priority for shoppers and an increasingly lucrative business platform for retailers. Purpose – We expect to see shoppers continuing to make decisions based on a broader sense of social responsibility. Consumers will be even more engaged and energized by a range of larger social responsibility issues by 2020.Retailing 2020: Winning in a polarized world Page 19PwC/Kantar Retail

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Digital divideBy 2020, we anticipate that retailers will be confronted with a "digital divide", presentingtwo very different multichannel shoppers with different shopping expectations that willbe difficult to address and serve using a single strategy. One of the only common patternsin shopper expectations will likely be that the online channel will be mandatory for mostretailers. Gen X and Gen Y shoppers are becoming more oriented toward onlineparticipation in everyday activities, including retail activities, according to Kantar RetailShopperScape®. When faced with a need to shop, their first inclination will be to searchand purchase online. The rest of the population will be more casual regarding onlineinteractions. For this group, shopping and social interactions will be based on a range ofshifting need states and situations. The largest change will be that almost all shoppers willbe in one group or the other; those who entirely opt out of shopping online will be asmaller segment.Ripple effects of the changing global shopperThe good news: Demand increases for global retailIncreased connectivity and a rise in the living standards of a growing middle-class acrossthe globe will create a heightened sense of awareness for global retailing (Fig. 11). Themassive flow of information, increased exposure to cross-cultural trends and diverselifestyles, and the flexibility of supply chain fulfillment could determine a new ―globalstandard‖ for the middle class by 2020. Regardless of home location, the global shopperwill expect the same product access and benefits that exist in developed economies,increasing demands for and consumption of all types of quality finished goods.Figure 11: Global Middle Class Statistics - population in millions 2009 2020 2030 North America 338 18% 333 10% 322 7% Europe 664 36% 703 22% 680 14% Central and South America 181 10% 251 8% 313 6% Asia Pacific 525 28% 1740 54% 3228 66% Sub-Saharan Africa 32 2% 57 2% 107 2% Middle East and North Africa 105 6% 165 5% 234 5% World 1845 100% 3249 100% 4884 100% In 2020, the percentage of the population considered ―middle class‖ is expected to shift from North America and Europe to Asia-Pacific, reflecting the region‘s surge of higher incomes.Source: Organization for Economic Cooperation and DevelopmentRetailing 2020: Winning in a polarized world Page 20PwC/Kantar Retail

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The challenging news: Demand increases for globalcommoditiesA far broader and more informed consumer base around the world will place greatertension on the base commodities needed to support rising consumer expectations.Increasing demand will put a strain on global commodity prices and as a result, impactretailers and consumers in both developing and developed economies. By 2020, pricingpressure and increased sourcing of commodities will continue to be prevalent as demandmounts in developing nations such as China and Brazil. Kantar Retail anticipates thatgasoline/petrol prices will continue to climb with increased global demand, impacting notonly the supply chain, but also petrochemical production and pricing.Global economics of procurementThe ability to manufacture products almost anywhere and deliver them to a consumerthousands of miles away is made possible by standardization of communications andtransportation systems. Within this context, manufacturers will continue to find thecheapest and most efficient way to source product for the end-consumer. Today, China isone option widely used for manufacturing. However, with the rising cost of living inChina and the appreciating Yuan, the next manufacturing hubs may be in other lessexpensive economies in Asia or Africa. Key drivers for this sourcing diversification will betechnological advancements that allow for seamless sourcing, lower or lowest cost, andevolving shopper preferences for products sourced globally.Seamless outsourcing of goods and servicesThe continued development of technology and the ―frictionless‖ nature of data exchangevia the internet will drive companies to emerging countries as potential markets foroutsourcing services. Competition for outsourced services will intensify and create moreoptions for retailers and consumers to select from, ultimately reducing cost andimproving cycle times.Manufacturing at homeWith increasing global demand for goods and services, we expect the cost of goods sold toincrease. In addition, transport-related cost, as previously mentioned, will be a decidingfactor for procurement location. In some instances, manufacturers will movemanufacturing bases back to the US where the benefit of short transportation and leadtimes will outweigh the increased costs. Further, shopper preferences may play asignificant role in where goods are procured–these preferences may be based on foodprovenance or product-safety-related issues. In all likelihood, the expansion of globalsourcing will not be seamless; even today, safety issues related to products from somedeveloping countries are a concern. Concerns regarding the quality of the global supplychain should create new opportunities for manufacturers and retailers to leverage morelocalized sourcing.Retailing 2020: Winning in a polarized world Page 21PwC/Kantar Retail

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Transparency and knowledge-centric shoppingBy 2020, advanced information systems tools will be available to glean qualityinformation from vast quantities of data. The result will be greater transparency andfaster answers to both business and consumer questions. Information regarding productsourcing, workforce management and financial transactions will be in the public domainregardless of how diligently companies work to keep the data private. Transparency willmanifest itself in multiple ways by 2020, transforming the ways in which retailers andconsumers interact and conduct business.Information exchangeConsumers will expect and demand an element of trust and reciprocity in theirrelationships with retailers. That expectation will include increased information flowregarding the conditions by which products and services are procured, the workingconditions in the company and its suppliers, and adherence to social responsibilitystandards. The information flow will not only be one way. Retailers will also have a viewinto their shoppers through the exchange of information generated during and after atransaction. The unhindered flow of information will help anticipate and respond toconsumer needs and causes (e.g., sustainability).Value perceptions change and pricing gets personalRetail pricing today is already complex, complicated by value statements aroundbranding, dynamic and aggressive competitors, proximity to other products, immediacyof use, and the product‘s role in the retailers‘ strategy. This is currently visible in howprices are widely available via smart phone applications and websites. We see this onlinetoday in the information and cost breakdown associated with cars and real estate. By2020, we anticipate that the level of detail available to shoppers will be far more complex,as retailers automate value setting using both store and digital devices to find the rightprice at the right time to close the sale (Fig. 12). This will allow more individualizedpricing, defined by what consumers are willing to pay as a ―fair price‖.Figure 12: Pricing Gets Personal Price comparison websites provide an up-to-the-minute view of pricing on all items in highly priced competitive markets. They also act as a clearinghouse for manufacturer coupons. In some instances, they will link a coupon directly to a retailers loyalty program so that it can be redeemed in store by swiping the shoppers loyalty card at the checkout.Retailing 2020: Winning in a polarized world Page 22PwC/Kantar Retail

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Challenges to retailer economic modelsBy 2020, many of the current models for successful retailing will have undergonesignificant change. Surviving companies will have to develop new strategies and tactics toengage the consumer in a profitable manner. Some of these will be ―back to the future‖ innature, as old models are enabled through new technology to make retail competitiveagain. Historically, retail‘s core economic equation was "can a store sell enough at a highenough margin per physical building to offset its real estate and operating costs anddeliver a successful return on investment (ROI)". New pricing mechanisms will putintense pressure on this margin structure. This leaves selling productivity as the other keyvariable. With far slower growth in aggregate demand in physical retail, retailers willneed to become even more focused on space productivity to maintain profitable returns.Managing square footage profit erosionOne of the core metrics for retail is the ROI of "productivity per square foot" of sellingspace. For multiple decades, stores were able to grow rapidly, but sales per square footwould typically increase even faster. Recently, this has slowed down or come to a halt,and by 2020 retailers will need to measure "productivity in profit dollars per square foot".This will squeeze profits even further. As a result, there will be a need for retailers toreview ways in which to keep stores profitable through shrinking formats and shorterterms associated with property, despite the higher costs incurred.Retailing 2020: Winning in a polarized world Page 23PwC/Kantar Retail

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Key trendsThis section describes key trends that will impact the US retail landscape by 2020: The consumer-driven supply chain Growth fragmentation of US retail channels Globalization: Why retail growth is coming from “unfamiliar” markets From multichannel to omnichannel: Fully integrated brand retailing Consumer-driven transparency of everything Consumer-centric retailingThe consumer-driven supply chainThe integration of supply chains at the local, regional, and global levels has been one ofthe major achievements of retailers over the last two decades. Additionally, due to theinfluence of technological advances and consumer demands for what and where they buyproducts, managing the demand chain is now an imperative for stronger growth. Goingforward, closer integration of the demand and supply chains will be needed to maximizevalue and drive profitable growth.By 2020, advancements in the business intelligence field will provide tools that will helpretailers better understand consumer behavior by examining behavioral patterns andoverall trends, even before the need has been expressed. Improving the accuracy of thedemand signal through analytics will help to drive efficiency throughout the supply chain.Simultaneously, consumers will have visibility into what products are available, theirprovenance, and how the product fulfills their needs. Through better alignment of thedemand and supply chains, both manufacturers and retailers alike, will be able to ensurehigher in-stock positions and "speed to shelf" to meet demand, and will compete to be thefrictionless interface to the consumer. This highly visible, end-to-end supplychain―equally accessible to all parties in the system, but increasingly working to theconsumer‘s favor—will be called the "consumer-driven supply chain."Key to end-to-end visibility of the value chain is understanding how consumers buy, whatthey buy, and when and where they buy―and adjusting retail strategies accordingly.How consumers buy: Group replenishment modelsBy 2020, the integration of the overall supply chain with relevant information sourceswill further expand the trend of consumer-formed groups to find their own acceptable―cost-to-value‖ returns. Earlier versions of so-called ―group buying models‖ weregenerally in scope with retailers and manufacturers that made offers based on thenumber of individuals buying. The future version will proactively seek out consumers,based on profiles, to participate in deals, in essence creating groups on-the-fly in order toestablish the best value equation. These groups will be based on purchase and lifestyleanalyses derived from purchase history, social media participation, and/or recognizedchanges in life stage (such as a child starting school or joining a sports team, or disease-state management). Retailers, whether multichannel or brick-and-mortar, will move to beRetailing 2020: Winning in a polarized world Page 24PwC/Kantar Retail

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either the provider or the key intermediary in these new ―smart‖ applications as quicklyas possible to defend and increase market share.What consumers buy: Integrated data from factory/consumptionThe retailer of 2020, we believe, will have the ability to monitor and use data that tracksproduct transactions and changes in the entire supply chain, from manufacturer toconsumer. They will use this information to reduce costs and realize new revenueopportunities including those from fast-emerging trends. From a value-added-servicepoint of view, this gives the shopper a clear view back to the factory floor to providereassurance for quality, availability and ethical sourcing practices. Given the visibility intothe process and the key decision points that are associated with costs (slow vs. fastshipping, distribution center vs. factory direct, standard package vs. special order), theconsumer can actively play a role in adjusting costs to individual needs and budgets.When and where consumers buy: Shift from linear tomatrix supply chainBy 2020, it will likely be possible for partners engaged in the entire supply chain to viewalerts and transaction information. These alerts will include end-to-end information aswell as external forces that impact the supply chain, such as unexpected demand, volatileweather or regulatory changes. Beyond the value of lower costs and improved fulfillment,it also will provide consumers with a vantage point for evaluating the supply chain fortheir own needs. Those needs, in fact, may be shaped by the very evaluation process, asconsumers become aware of availability or scarcity of products. Given the potentialchallenges around commodity procurement and pricing, this point should not beunderestimated for manufacturers or retailers by 2020.Growth fragmentation of US retail channelsGrowth fragmentation of retail channels will be prevalent in 2020, primarily driven byongoing shopper behavior fragmentation and ever increasing access to productinformation and end-use opinions. In particular, brick-and-mortar formats will need tobe more precise in their positioning in order to flourish in a world where stores will beunder pressure from non-store retail.Shoppers will be armed with information and focused on finding the best fit for theirchanging needs, with retailers and their trading partners trying to play ―catch up‖.Shoppers will be influenced by fast-developing viral trends and retailers will becomemuch more nimble in their marketing efforts. New product trial and categoryexperimentation will become easier and more common, as the risk of new product trialscan be mitigated by user opinions accessed via easy-to-search blogs and recent onlineproduct reviews. In parallel, retailers will be refining their shopper insights and shoppersegments to find more consistent and profitable response behaviors. Overall, this processwill require retailers to find growth in manageable, niche audiences or fragments and toisolate and respond to newly forming, or dynamic ―pockets of opportunity.‖Retailing 2020: Winning in a polarized world Page 25PwC/Kantar Retail

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Redefining shopper segments: From large populationto smaller targeted segmentsBy 2020, relying on large consumer marketing campaigns followed by supporting sub-campaigns to reach smaller segments will not be as strongly embraced, as consumerinformation sources continue to become more robust and fragmented. Retailers will haveto redefine messaging and store formats to more granular geographic levels and will needto redefine their placement and use. Based on the need to rapidly open and adjust storesto respond to the changing needs of this population, growth in this space will bedominated by smaller units. These smaller stores will also have a high-degree of digitalintegration to expand online retailing and related applications. This hybrid of the physicaland online worlds will provide a means of rapid change to match the evolution of thetargeted segments or new ones that might emerge.Retail growth: Shift to non-traditional formatsOver the coming decade, the pressures of competition and the range of digital shoppingsolutions will, most likely, force retailers to reconsider the value of their originaloperating formats. Many of today‘s major retailers will be transitioning from theiroriginal business model into non-traditional, typically smaller store formats. Thoseformats are likely to be numerous and varied to match the shifts in what, when, andwhere consumers want to shop. Many of these non-traditional formats will be temporal innature, such as pop-up stores, mobile retail trucks, or flash websites existing for certainperiods of time in temporary physical locations. Some current examples of pop-up storeformats include holiday toys, fashion-show street sales via mobile stores, and urbanbodegas with 30-day lifecycles featuring one-off products or unusual imports.Figure 13: Rise of Non-Traditional Store Formats―Pop-Up store, LondonUnderground The pop-up store is a non-traditional smaller format that is gaining in international use. It moves away from permanent ties to a specific location to a small limited store in a short time period. Pop-up stores, situated in high-traffic ‗trendy‘ areas, such as the one featured on Monmouth Street in London, create a platform for introducing new products and gaining a wider clientele.Source: Kantar Retail Store Visits, March 2012Retailing 2020: Winning in a polarized world Page 26PwC/Kantar Retail

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Globalization: Why retail growth is comingfrom “unfamiliar” marketsKantar Retail expects moderate and sustained economic growth will have returned to theUS by 2020 (Fig. 14). However, for most retailers, we forecast that growth will be weakerthan in prior economic eras as aging generations, which currently account for a largeportion of the US population, typically slow consumption as they age and purchase less.At the same time, the US middle-class is expected to have retained many of the deal-seeking shopping habits adopted during the recession period. Therefore, we anticipatethat with the need to find retail growth in 2020, retailers will push harder into newmarkets in which they do not operate today. The need to go beyond their ―comfort zone‖of traditional formats and home markets will cause retailers to rapidly and continuallyrethink their roles and store formats.Figure 14: Kantar Retail‟s Point of View on Short- and Long-termDisruptions Short Term (~2012-2013) Long Term (~2014-2020)Expected Persisting Disruptions: Fiscal/Monetary PoliciesNegative Oil Supply Threats,Impact Euro Financial Crisis China/Emerging Markets Regulatory/Financial issuesExpected Fuel Prices, Food Prices, Housing Non-Food/Fuel Prices,Mixed Market, Business Investment, Wealth/Stock Market,Impact Wealth/Stock Market, Jobs, Demographic Factors (e.g. Have vs. Consumer Confidence Have Nots)Expected Non-Food/Fuel Prices, Interest Dissipating Disruptions:Positive Rates, Fiscal Stimulus, Exchange Oil Supply Threats (Iran),Impact Rates, Shopper Spending Intentions Euro Financial Crisis China/Emerging Markets Resolved Regulatory/Financial Issues Jobs, Income, Confidence, Shopper Spending Intentions, Housing Market, Business InvestmentExpected Short-Term Outlook: As safe haven, Long-Term Outlook: 2012 and 2013Net U.S. will fare well relative to rest of most vulnerable to slow-down, butOutlook world, although growth will still slow dissipating impact of global in nominal terms and weaken in unit disruptions will create better volume terms. conditions for long-term growth.Retailing 2020: Winning in a polarized world Page 27PwC/Kantar Retail

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In the long term through 2020, growth conditions in the US retail market are expected to improve as various global and domestic economic shocks and disruptions dissipate in their macroeconomic impact. In the short term, particularly through 2013, Kantar Retail believes that these disruptions will weigh on US retail growth. Growth will likely be sustained at modest levels, however, as the US market maintains a ―safe haven‖ appeal compared with the European and emerging markets hurt most directly by these market disruptions. Price inflation will be a key factor shaping the outlook in both the short term and long term periods.Retailers will be also looking across national or geopolitical borders for solutions tocommon consumer needs. The universal nature of the internet and social media willinfluence the development of commonalities in habits and needs globally. For manypeople, virtual communities will be the starting point for interests and lifestyle choices,but with more volatility and interaction across all borders. The isolated regions will reflectthis global influence even more than is observed today and will further erode and evolvethe retail environment.Retail growth: Finding the unknown landsBased on Kantar Retail analysis, we anticipate that finding profitable growth may requireretailers to become more global in terms of supply chain (efficiencies and cost savings)and to procure an ever-growing product set for consumers. They will be forced to thinkmore globally to find new sources of revenue outside of their existing store footprints orbrick-and-mortar formats.At the same time, going global will likely not be easier in 2020. Africa is the fastestgrowing continent, but also one with a challenged infrastructure (Fig. 15). Though Indianretail environment shows many of the characteristics favorable to formal retaildevelopment, based on growing income per capita and systematic modernization, therewill be ongoing struggles with the introduction of formal retail, given the limitations fromnational and state laws as well as with Indias developing infrastructure. The Middle East,Western Asia, and North Africa are all areas of rapid economic and population growth,but each poses significant challenges for retailers--both local and global.Figure 15: Global Retail Formats Africa is a region that has experienced a range of challenges that have slowed the growth of formal retail, but more recently, local retailers that have successfully navigated the challenges have gotten the attention of multinational retailers looking for expansion opportunities.Source: Kantar Retail Store Visits June 2012Retailing 2020: Winning in a polarized world Page 28PwC/Kantar Retail

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Format dynamics: Parallel evolutionAs retailers expand globally, they will experiment to find the right physical or virtual storefor a range of consumers. This process will produce winning formats suitable to meet theneeds of consumers in multiple countries. The smart retailer will analyze why a particularformat launch was successful; they will translate that knowledge and criteria as theyattempt to move into new markets with a winning format. This will not be a linear processthat arrives at the ―ultimate concept‖, but rather a merging of common success elementsinto a format that can morph and keep up with the needs of rapidly changing consumersand cultures. Some of this can already be seen in the UK where some large retailers areconverting small stores into fulfillment centers, enabling the expansion of online grocerysales. In addition, with their newfound role, these small stores also act as localconvenience stores or small grocery formats for the local population.Global consumer trends: No longer nationalIt is anticipated that the 2020 global consumer will be more aware and responsive to theearly formation of trends, by way of instant communication and streams of information.Some trends will work on a rapid cycle, with some remarkably important for just a fewdays or even hours. Retailers will be monitoring these fast-emerging trends closely, tryingto filter the ones that they can respond to with the products and services they alreadyhave. In online retailing, the endless shelf concept will serve as a come-as-you-arereaction to rapid consumer demand or sudden changes. Therefore, predictive analysis ofshopper trends, done at a rapid pace, will become a necessary new means of projectingproduct planning to allow for flexible product response as needs arise.The neutral marketer: Finding the common avatarAs retailers seek international expansion, they will be confronted by the same dilemmathat global manufacturers face today: whether to market locally authentic or globallyneutral. In the locally authentic approach, understanding local cultural and keyconsumer drivers can be a time-consuming and costly investment, but it mitigates therisk of getting the message right, but the tone wrong. Using a globally neutral marketingapproach means developing a set of marketing messages that work in most cultures byleveraging neutral ideas instead of culturally sensitive or locally relevant marketingcampaigns. The most common solution will be to leverage automated human or animal-like avatars (computer representations of a person, company, or entity) to deliver to awide, diverse audience (Fig. 16). In the future, we believe these concepts will become anarea of competition as retailers try to find solutions that not only cross nationalboundaries, but appeal to the transnational interest groups that they are potentiallyseeking.Retailing 2020: Winning in a polarized world Page 29PwC/Kantar Retail

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Figure 16: Avatars Avatars have evolved into a highly sophisticated computer generated set of images for advertising purposes. Companies are able to leverage human-like images as avatars to communicate their brand message universally, across all markets in which they sell.From multichannel to omnichannel: Fullyintegrated brand retailingMultichannel retailing is most often associated with retailers that have brick-and-mortarstores combined with an online retail channel. A new concept is now emerging, called―omnichannel‖, which describes a channel-agnostic view of how consumers experiencethe retailer brand. Shoppers increasingly demand a consistent level of experienceregardless of channel or mode by which the retail is accessed. Such shoppers avoidretailers who are ill-equipped to deliver a seamless brand experience online, in-store andacross multichannel media, both consistently and continuously.By 2020, we believe the need for a unified consumer omnichannel experience will becomplicated by the need for nearly perfect execution. However, expert use of businessintelligence tools, coupled with a profound understanding of shoppers‘ needs andexperiences in real time, may make omnichannel a realistic goal.One shopper, one retailer: The experience is the sameWith the convergence of physical retail formats, digital services, and eCommercechannels, retailers are currently confronted with the need to correctly deliver a fullyintegrated shopper experience from start to finish. By 2020, this should be a reality, withshoppers experiencing retailers as a single brand consistently across all points of contact,both virtual and real world. Retailers will strive to find a means of bringing the one-to-one relationship of the internet to the mass-oriented store setting.Inquiry, procurement, fulfillment: Decoupling thechainThe competitive pressure to get the total retail brand experience correct regardless of howthe shopper touches it, will put additional pressure on how retailers are organized.Instead of each format or channel managing its own customer touch points, they will bemanaged across channels by third-parties. Internet service providers (ISPs) alreadyspecialize in key activities within online retailing such as transaction and creditmanagement, product inventory and order status. Key to managing and leveragingRetailing 2020: Winning in a polarized world Page 30PwC/Kantar Retail

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disparate third party services is the ability to act seamlessly with online retail processes.This same uncoupling of functions will create a dynamic environment inside physicalretailers, especially as digital activities become further integrated into brick-and-mortarstores. Point of sale stations, already heavily weighted toward self-checkout, will bemanaged and monitored by the same company that does transaction management online.Customer support, already offering a range of options for shoppers to interface withonline, will be found within the aisle.Full service retailers: Being the only stopA competitive advantage for retailers in 2020 will be attempting to redefine one-stopshopping as part of that seamless, omnichannel experience. The convergence of physicalformats, online formats and digital tools enables consumers to browse and purchaseproducts almost anywhere on a smart device. Thus the notion of one store as a complete,one-stop shop will likely be less relevant. One-stop shopping in 2020 will be more aboutone retail brand offering a number of options for order and fulfillment: home delivery,store pick-up, or in-store payment (e.g., ―click-and-collect‖ concept where shoppers buyonline and pick up their purchases in the store). This opens up the potential of virtualinventory management for the best possible location - which is often the distributioncenter or vendor depot.An additional benefit of integration is the facilitation of a wider range of services, madepossible by having instant access to the expertise of a dedicated third-party provider withretailer transaction data. These services will range from simple home delivery andshopping list administration to more complex functions like financial management. All ofthese will be attributed to the retailer (and its brand) regardless of the actual providername. This single, full service brand offering will be important to gaining wallet share(amount of a consumers spend in a particular category that goes to a particular retailer)and building brand awareness with those shoppers who expect nothing less.Retail integrated to brands: Synergies createdGiven the range of different media tools and shopper interfaces available across aretailer‘s omnichannel footprint, manufacturers will increasingly weave their ownbranding initiatives into those of the retailer. For example, if shoppers are searchingonline to replenish paper products, the brands they are offered will be co-branded withthe retailer they most often shop, or perhaps the retailer closest to them. Integratedmarketing efforts will provide similar retailer-manufacturer branding synergies, enabledby business intelligence (BI) tools that help personalize communications to individualshoppers.Consumer-driven transparency of everythingSavvy shoppers by 2020, we believe, will be equipped with ever expanding abilities to―see‖ into the inner workings of retailers, manufacturers and distributors across theentire supply chain. Today, shoppers focus on key issues related to retail and consumerpackaged goods manufacturing, such as corporate social responsibility and ensuringtransparent product quality (e.g., ―certified organic‖ standards). Tomorrow‘s shopperswill be more attuned to the true transparency of raw ingredients, fair trade procurement,and the environmental impact of all ingredients, packaging, transport and storageprocesses, up and down the supply chain.Retailing 2020: Winning in a polarized world Page 31PwC/Kantar Retail

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For retailers in 2020, this opportunity is not without risk; transparency means having tore-examine, properly document, and continuously track all supplier relationships,product sourcing, even third-party labor practices. By 2020, we believe efforts to limitsuch transparency will be repaid with possible consumer backlash fueled by the viralnature of social media and other online communications.Legitimate personalization: Consumer-created valueThe concept and lure of ―mass customization‖ has been of growing interest to bothmanufacturers and retailers. The challenge has been to engage consumers so that they arenot only part of the process, but also take active ownership of it. By 2020, we believe ashift will occur, requiring retailers to seamlessly integrate customization-relatedprocesses with existing consumer-driven personalization tools. In the near future, thatinterface may be as simple as offering menu options in a restaurant to match dietaryneeds or suggesting specific financial products that are relevant to a particular life stage(Fig. 17). The edge that retailers will be seeking to achieve is comprised of moreprofitable, complex solutions that offer real value to individuals―such as point-of-purchase options (e.g., home décor selection and installation services ordered in a singletouch) or more broadly, online choices (e.g., recognition, with nuance to infinite socialawareness parameters that offer a limited assortment of ―affinity‖ products).Figure. 17: Future Shopper Interface A touch-driven display to build a salad shows the integration of the learned process of using touchscreens from tablets. The future will consist of the integration of complex solutions into seamless solutions, based on a common tactical interface for shoppers.Source: Kantar Retail AnalysisSeeking out the truth: Real brand valueThe 2020 consumer will, most likely, have the tools to research various parts of aretailer‘s operations and will have access to information from key oversight or governingorganizations (e.g., palm oil awareness, renewable energy advocacy groups, etc.). Theywill also have access to applications that specialize in providing this information. By2020, smart phone applications, we believe, will proactively inform a shopper regardingspecific issues with products or retailers upon entering a retailer‘s brick-and-mortar storeor using its website. Managing and manipulating information (e.g., for rumor control),will be more of an issue than ever as ―flash truth‖ reports are distributed more frequently.Brand management by 2020 will need to develop a host of new skills, tools, andcommunication modes, both nimble and innovative, than are typical today.Retailing 2020: Winning in a polarized world Page 32PwC/Kantar Retail

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Green retail requirements: Transparency forcessourcingThe consumer of 2020, we believe, will be curious and diligent about tracking retailersand their key suppliers. Given the ongoing fragmentation of sourcing, it is likely thatsome action on the part of one or more suppliers will be revealed to the public as illegal,dangerous, or unethical. Retailers will, in turn, increase their capabilities in riskmitigation, both automated and human, with a core focus on the issue at hand (e.g.,sustainability). As retailers have shown today, sustainability is a social issue thattranscends nationalities and communities, though often expressed in local variations(e.g., sustainable farming in the US, carbon footprint in Canada, palm oil in the UK).Withthe tools and information sources available to consumers in 2020, the metrics associatedwith ―green retailing‖ will, most likely, be provided as easily accessible scorecards. Thesescores will often be brought to the attention of shoppers as they make a retail locationchoice using their smart device. Retailers will find advantages not only in managing theiroperations for strong scoring, but also in evolving a scorecard to match their owncapabilities over time.Consumer-centric retailingConsumers will be moving targets in 2020 as they respond and react to trends, fads, andinformation faster than in the past. Retailers will try to move at the same speed asconsumers, but their best strategy will be to get as close to the consumer as possible. Thatcan be attained through digital engagement or by placing brick-and-mortar stores in ideallocations to tap into new shopper groups or to supply a product range that appeals tolocalized shopper needs. It will also require changes and evolutions in retailer businessmodels as they try to stabilize and improve the ROI of existing brick-and-mortar assets.Getting smaller to get closer: Consumer formatengagementThe trend away from large stock-up shopping (meandering aisle to aisle) to moretargeted, time-efficient, needs-based trips will continue. Convenience driven shoppingtrips are anticipated to increase in 2020 as families become smaller and the USpopulation ages. They will shop stores that are easier and faster to access. With a reducedaverage store size, retailers will need to serve different trip needs with limited choice ortailored assortments.The concept of the ―endless aisle‖ online, and the integration of online with brick-and-mortar shopping, will likely become reality as these smaller stores become more engagingand are more likely to be integrated with digital and internet resources at the shelf level.In-store integration with online will also make small stores ideal fulfillment centers forinternet shopping sites.Retailing 2020: Winning in a polarized world Page 33PwC/Kantar Retail

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The missing shopper: Online steals tripsKey replenishment items and destination categories have historically driven shoppingtrips and the retailer‘s mission was to capture the trip by means of having the bestselection, value, or product quality. Online retailers, like traditional brick-and-mortarcounterparts, must be concerned with the destination categories that draw consumers totheir virtual shelves. Online megasites have already shown the power of using a lossleader category (e.g., diapers) to capture trips from brick-and-mortar competitors. In2020, we project there will be a broader range of online retailers with greater penetrationand knowledge of shoppers‘ trip needs. Each will be looking to optimize a number of―must have‖ items to entice and retain key shoppers.Retrofitting to new economics: Making square feetwork harderWith online shopping and replenishment growing, retailers are already preparing for anerosion of physical-store sales. As sales per square foot decrease, retailers will need toeither increase same-store sales or shrink selling space to balance their numbers. Anotheroption available to retailers in 2020 will be to transform large existing stores into otherlines of business and services. Some in-store services, like banking, are already growingtoday. Retailers will see the opportunity of sharing space and infrastructure with storesthat are still open; they will merely be locating the retail portion to a smaller space withina larger box. Medical services, financial planning, and government offices are allcandidates for this type of alternative sharing of excess space and leveraging retailerexpertise in location maintenance and security.Big Box or big eCommerce: Coexistence will be difficultBig Box store growth started to slow in 2010. By 2020, Supercenters are likely to havereached the end of their lifecycle as smaller formats will have figured out how to offerbroad selections and competitive prices using a range of new fulfillment techniques andtechnologies. Transitioning away from mega-formats will require new uses for these largespaces. Big Box stores may become alternative distribution centers and managementsupport offices for clusters of smaller stores. Meanwhile, eCommerce sites will grow,requiring innovative internet purchasing solutions and the need to integrate them intolarger operations to gain economies of scale.Retailing 2020: Winning in a polarized world Page 34PwC/Kantar Retail

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Outlook and implicationsIn this chapter, we highlight some factors that retailers and suppliers should consideraddressing in order to manage the complex and diverse ―retail realities‖ that will likelymake the retail market more challenging by 2020, and assess the forces we envision willimpact the retail industry. Total data value chain management Dynamic clustering to optimize fragmented growth Competing on a truly global scale Branding in omnichannel space Managing data security and privacy Managing diverse retail modelsTotal data value chain managementThe years leading to 2020 will be about pulling together essentially three types of data:1. Value-chain-centric data (granular) contains all of the relevant information about trading patterns such as product movement and pricing information, both between trading partners and the end-consumer.2. Value-chain-related data (both “random” and seasonal) is causal information that falls outside the direct value chain. It entails impact of seasonality, shocks to the system (e.g., an extraordinarily successful competitive launch or a natural disaster), and changes in causal variables (fuel prices that drive both retailer performance and category growth rates).3. Value-chain framing data (tectonic) entails tracking the big tectonic shifts that move the landscape over time (e.g., demographics, diversity, changes in domestic infrastructure and purchasing power).Data platforms will need to get better at moving between data fields aimed at massivelydifferent scopes, something that inflexible legacy data architecture makes very difficult.Data mining: Extraction rather than collectionHistorically, most of the capital expense of data mining involved the collection andwarehousing of information, with less attention to how the data could/should beextracted. By 2020, ―data mining‖ might still be a useful term, provided that the capitaland resource allocation shifts to the "mining" aspect (extracting the valuable data) andnot the ―acquisition‖ of mines (databases). By 2020, we believe leaders in data miningwill bring two core attributes to the mining process: flexible architecture and greatstorytelling.Retailing 2020: Winning in a polarized world Page 35PwC/Kantar Retail

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Flexible architecture. Most data mining today is somewhat limited by the layout of the mine. We can go across or down in fairly prescribed ways, many of which tie back to the legacy architecture of a system built for an entirely different world. Great data miners in 2020 will be able to recalibrate the layout of the mine depending on the desired outcome and will need to develop great data framing skills. From a people perspective, this will require teaming people that understand the data with people that understand the architecture of data, working alongside the people that use the data regularly. By 2020, the idea of IT as a separate function or structure will be, most likely, obsolete. The data architects become almost a permanent liaison between the merchants, marketers, and operators in the retail world and the field of information available. Great storytelling. The mining process is not just about architecture, but about turning the outputs from raw material into something much more valuable. The data team of the future will include data ―polishers‖ as a core component of the team. The team will increasingly look to develop people with data fluency: those that understand where the data came from and are also capable of simplifying the data into compelling, actionable business stories. Collectively, this data mining and application know-how will be a critical competency of leading retailers and manufacturers in 2020.Integration between consumption and fulfillmentRetailers will continue to integrate themselves seamlessly into their shopper‘sreplenishment processes, and best-in-class retailers will find ways to act as a bridgebetween this real-time consumer data and the rest of the supply chain. The implicationsfor a retailer‘s system architecture are significant: leading retailers of 2020 will, mostlikely, be known as the fastest ―data translators‖. Retailers that can create value for theirtrading partners by aggregating and redistributing real-time consumer information inuseful ways will be the sought-after partners.Dynamic clustering to optimize fragmentedgrowthDynamic clusteringThe formation of rapidly fragmenting shopper segments, compounded by the ongoingfragmentation of retail growth, points to segmentation being important by 2020.Particular influence will come from the ability to cluster fragmented opportunities so thatthey can be aggregated into scalable growth platforms.Being able to identify like patterns of opportunity in geographically diverse areas is afoundational skill for dynamic clustering. For instance, national food retailers andsuppliers have historically been able to identify similarities between Rochester, NewYork, and Charlotte, North Carolina–two markets that have strong premium grocerycompetitors. For large companies to succeed in a fragmented retail world, takingpolarized data and collecting it into scalable platforms like this will become important.To extend this example, Rochester and Charlotte are not similar for every businessproblem; for seasonal programs, anticipating summertime to come to both citiessimultaneously may produce an unfortunate result. That‘s why this clustering skill needsto be dynamic–it‘s the business application of the flexible architecture outlined above.Different business problems will yield different ―similarity clusters‖, and winningRetailing 2020: Winning in a polarized world Page 36PwC/Kantar Retail

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organizations will be able to attack the problems that are most important with equalvigor, regardless of how those clusters take form.One particular business challenge may deserve particular attention: for most of thedeveloped world, the majority of growth in young families between now and 2020 willcome from the ―non-majority‖ population. Though this is a well-understood phenomenonin the US (due to ongoing growth of Hispanic populations) and Canada (due to a historicswell of immigration from a variety of countries), there may be real opportunity totranslate multi-cultural marketing tactics to markets like Europe, Mexico and Brazil, inorder to capitalize on immigration patterns in these key geographies. Some retailersalready do this well, and thus we expect to see the acquisition of high-capability chains tohelp larger, less nimble retailers quickly build this type of competency.Dynamic structuresThe notion of adapting strategy to situation is hardly revolutionary, but today many retailorganizations struggle with this concept. By 2020, we believe success in this area willbring competitive advantage. Legacy brick-and-mortar retailers tend to haveoperationally-centered organizational structures based on the need to manage stores andtrading areas and to drive standards and accountability across thousands of disassociatedemployees. An opportunity-centric structure for headquarters personnel would be aradical departure, but one that may be essential to optimize the fragmented world.Forward-looking retailers are already working to reframe the way their teams think aboutretail by consistently experimenting with structure and adapting it to shoppers‘ cultures.Dynamic resource allocationIf structure suffers from an overly linear and rigid challenge, resource allocation andfunding management may suffer from the opposite issue. A disproportionate amount ofthe energy required to prepare for 2020 will be spent on understanding not the massivestrategic shifts in the industry, but how the shifts truly impact the granular work like howtrade funding flows to and through retailers. A dynamic pricing environment and anomnichannel branding world will place more strain on supplier/retailer relationshipmodels. When a supplier runs an ad on a retailer‘s website, is that trade-centric or brand-building spend? Suppliers today separate those buckets of funding with great zeal (due inpart to the pressure on fair and equitable trade spending required by antitrust laws). Inthe future, the trading partners that master a more transparent, solution-orientedapproach to this issue will need strategy informed by deep operational understanding tobring dynamic clustering to life.Competing on a truly global scaleMarket clustering: Mapping “uncomfortable” placesThe Rochester/Charlotte comparison example becomes even more acute for companiestrying to understand how to leverage global competitive scale. Retailers and their tradingpartners anecdotally know that geographically disparate markets have enormouscompetitive similarities. Today, some companies have structures that reflect thisunderstanding. Given the differences between US and Canadian retail realities, globalretailers often align Canada with its more similar market partner, the UK, rather thancluster it with its geographically adjacent US market. The systematic ability to look atmarkets around the world and allocate resources appropriately will require different waysof configuring global teams rather than traditional regional structures or old groupingconstructs like ―developed‖ and ―emerging.‖ Companies that use these constructs toapproach the retail trade in BRIC countries (Brazil, Russia, India, China) today will beRetailing 2020: Winning in a polarized world Page 37PwC/Kantar Retail

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Kantar Retail - Market Evolution Model (MEM) This model categorizes each country according their retail development stage. Correlation can be made between measurable levels of retail development and the type of format operated: Exploration: The market is overwhelmed with non-formal retail: Mom & Pops, stalls, carts, sidewalk sales, door-to-door, etc. with relatively minor penetration of formal retail.  Concentration: Formal retailers start entering the market from outside and internal retailers start to concentrate into larger companies to compete. At this stage, retailers are competing mostly by converting informal consumer to shoppers, not with each other.  Penetration: The market starts to become far more competitive as different retailers vie to be the primary shopping location. It is common to see "compare our price" signs as retailers compete on price more than on brand value.  Maturation: The market starts to further concentrate into fewer companies, some major retailers go out of business as available real estate saturates the market. Branding, loyalty, and private label gain importance at this time.  Post-Modern: The fight for share-of-wallet becomes the primary driver as smaller and more specialized retailers don‘t seek to own the shopper, but to capture the most they can when shoppers are in their stores.Source: Kantar Retail AnalysisRetail glocalization and the “de-emphasis of nationalboundaries”Today and going into 2020, with online activity being a truly globalizing force, and brick-and-mortar becoming increasingly trade area-centric, we anticipate best-in-classcompanies will continue to ask themselves a rather existential but important question ――What do countries really mean?‖.For reasons ranging from language to law to history, most companies in the world arerooted in a geographic operating structure; the ability to think outside this legacystructure will be critical to optimizing competitive advantage. By 2020, we anticipate thatbest-in-class retailers will operate using the concept of ―trading ecosystems‖, adept atunderstanding how those ecosystems require different competitive strategies. Inparticular, the world‘s two largest retail markets–the US and China–will yielddisproportionate reward to the retailers that can master and exploit similarities anddifferences in these ecosystems.From negotiation tool to partnership constructionMultinational retailers have tried for years to identify the ―right way‖ to connect withtheir global B2B (Business to Business) trading partners. Many retailers have emphasizedthe increased negotiating leverage they receive, while others have sought to transfer bestpractices from market to market. Longer term, the ability for global companies to achievetrue global joint business planning will be critical, but a significant part of the process willbe sifting through and prioritizing limited resources in order to do this globally. Thus, the―global plan‖ will identify areas of mutual benefit for global development and guide howto capitalize on those most effectively. In particular, the work that each trading partnerRetailing 2020: Winning in a polarized world Page 39PwC/Kantar Retail

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undertakes around the ―big issues‖ can reinforce their social credibility to appeal to ayounger, global generation for whom those issues genuinely matter. Retailers that aresuccessful in this endeavor will become constructive leaders in 2020..Branding in omnichannel spaceFor retailers, the notion of omnichannel branding and consistently delivering a seamlessexperience across channels presents some distinct challenges, since most great retailbrands were not built via media in the first place. Even retailers that spend billions eachyear on media advertising admit that the stores "make or break" their brand. For retailerswho spend much less on formalized consumer marketing, this issue is even morepronounced. Therefore, integrating digital aspects should offer unique opportunities forretailers to build their brands, in particular anything rooted in social interaction orconversational marketing.Starting today, leading retailers will need to begin building key capabilities and newmultimedia, omnichannel-enabling tools to be able to optimize this environment over thecoming years.Integration, the gravitational centerAs retail evolves to 2020, retailers must guard against becoming overwhelmed by thetransactional data available for analysis. As that potential data set spreads in a mobileworld, retailers will have almost limitless potential to maximize their business bymarketing to shoppers at a specific time, in a specific place. Though this capability willhave value, great retail marketers will understand that without a central proposition toanchor this wealth of data, a retailer‘s brand will end up an outcome of this aggregatedtransactional information, not a driver of shopper behavior as intended. This inherentlyreactive positioning could be harmful to large companies trying to optimize theireffectiveness in a fragmented world. In other words, in a world of overwhelming inputs,the key skill for success will be knowing what not to react to.Retail brands in 2020, we believe, will have three key attributes: consistency, intensity,and accuracy.1. Consistency. In a fragmented world, the need for a multitude of shoppers to have a similar impression of what the retailer stands for actually becomes more important, not less.2. Intensity. In this highly competitive world, only the retailers with a passionate following can meaningfully influence shopper behavior. Without passion there are too many other third parties and influencing factors that can distract or dilute the retailer‘s relationship with its core shoppers.3. Accuracy. The ―transparency of everything‖ will require retailers to be truthful to the image they portray in all aspects of their business. A role like ―Global Integrity Officer‖ may be an organizational response to the ongoing drive toward transparency. This role would oversee everything from supply chain to shelf to ensure that the retailer‘s core brand tenets pass the shopper‘s ―truth check.‖Retailing 2020: Winning in a polarized world Page 40PwC/Kantar Retail

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The lost art of conversationModern retail has been undergoing a 50-year transition from the classic shopkeeper-customer (one-on-one) relationship to the impersonal mindset that shaped so much ofthe modern mass-retailing era. Today, a number of retailers are working to go back toone-on-one relationships, but are quickly realizing that a people-based model struggles tobe scalable beyond a certain point. Time will tell how scalable the one-on-one in storeconsultation model is for other competitors trying to emulate it.Retailer conversations in 2020 will, most likely, have great people at their core, but thosepeople will need to be supplemented with best-in-class real-time information. At thesame time, the information must be used to understand more than just what that shopperbought and how to get them to buy more. The core competency in 2020 will beintegrating and acting upon what the shopper‘s passions and interests are with what he orshe bought in that store and beyond.Conversations are essentially real-time, two-way transfers of spoken information andunspoken emotion. Successful retail brands will use integrated information, storefixtures, and people to embody this consistently. The other key part of the conversation isshowing how the retail enterprise reacts and evolves based on the insight derived fromtracking these conversations. Today, smaller retailers and regional operators have set thepace in this type of communication; the larger players will have to try to execute this wellover the coming decade.“Live together, die alone”: Why suppliers and retailersshould partnerThe omnichannel world fundamentally changes competitive dynamics. In the future,instead of market share being narrowly defined as stealing share from your channelcompetitor, ―share‖ will become a much broader concept. In particular, ―share ofengagement‖ will be a critical objective: How much of a shopper‘s relevant ―airtime‖ doesa brand influence or shape? The historic battleground between retailers and suppliersbecomes irrelevant in a world where the war for engagement is being fought by onlineretailers, social media platforms and whatever else engages the shopper. Theomnichannel world presents almost limitless opportunity, but it also presents the risk oferoding the brands of suppliers and retailers in new ways. Historically the efforts toinfluence the shoppers journey have largely been undertaken by the "asset-owners" in thevalue chain- the suppliers and retailers. By 2020, entities such as Google and Facebook(the former of whom has already written a book on the topic "The Zero Moment ofTruth") will also play an active role in influencing shopping behavior.Managing data security and privacyOver time, data management will likely be a competitive differentiator between retailers,whether they manage it themselves or partner with outside experts. This decision will befundamental for companies based on skill set and investment capability. Accessibility vs.security will be a trade-off to consider. Between now and 2020 there could be massiveshocks to the data ecosystem, if deeply personal and confidential information is leaked orstolen. The shopper of the future will almost certainly use retailers‘ effectiveness at datamanagement as a filter for where to shop and spend–savvy online shoppers already dothis today, knowing that many ―too good to be true‖ website offers are simply generatorsof new email lists for marketers.Retailing 2020: Winning in a polarized world Page 41PwC/Kantar Retail

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There are a few essential skills that the retailer of 2020 will need to master, includingbuilding "digital engagement segmentation", cost/benefit/risk management, andreputation recovery processes, among others.Building “digital engagement segmentation”Today‘s shoppers are generally regarded as being ―tech-enabled‖ or not. In 2020, thiscontinuum will almost certainly be more sophisticated, and a core element of howrelationships and marketing are managed. A gradation of shopper attitudes and theirreliance on technology and personal electronics will emerge. There is a distinct possibilitythat their relationship with big and small data will be one of the key criteria used tounderstand brand and communication strategy in the future.In particular, retailers that have a major asset commitment to brick-and-mortar storeswill need to understand that over time their shoppers are going to show less tech andengagement aptitude. That probably means appealing to an older shopper base and/or amore tech-skeptic crowd. Brick-and-mortar retailers may find some advantage inpositioning themselves as ―data free zones,‖ with guarantees about the limited ways inwhich data about them and their transactions may be used. In particular, retailers thatare under-leveraging the analysis of their loyalty card data may, between now and 2020,invent a competitive positioning rooted in non-intrusiveness and try to leverage this as ago-to-market strategy.Cost/benefit/risk managementThis segmentation melded with the retailer‘s own analysis yields interesting insights aswell. If, as anticipated, data privacy becomes a hot-button issue for consumers, it is safeto assume that opportunistic lawyers are not far behind. Without significant tort reformin the US, the cost of being a data owner in 2020 could be astronomical–it would not besurprising to see a ―data malpractice insurance‖ industry spring up to reimbursecompanies trapped in multi-million-dollar privacy breach suits. This speculation suggeststhat there will be many different ways for retailers to frame their data engagementstrategy; assuming that all retailers will proceed into this highly data-enabled world at thesame breakneck speed is erroneous.Reputation recovery processesAny company that commits to a leadership position in data management and analyticsneeds to invest significant resources into an actionable plan that anticipates data securitybreaches. Today, the scale of resources allocated to physical disaster recovery is probablyakin to the scale of the resources that should be dedicated to ―reputation recovery‖ in thefuture.Managing diverse retail modelsThe 2020 retail landscape will be dominated by retailers operating increasingly complexoperational, financial, and brand models. In many cases, this same large retailer will beforced to understand and operate a multitude of these physical formats, and try tounderstand how to optimize the efficiencies of one infrastructure serving different storefootprints. This reality creates several critical implications for retailers and their tradingpartners, which can be defined as ―The quest for the new efficiency‖:Retailing 2020: Winning in a polarized world Page 42PwC/Kantar Retail

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Elements of "The quest for the new efficiency"Part I: Opportunity realization. Today ―efficiency‖ in business has a relativelynarrow definition, generally framed in the context of conducting the same work morecost-effectively. In a fragmented-growth world, however, if this efficiency calculation doesnot consider the opportunity cost of overly rigid/centralized structures, it will not reflectthe true ―cost‖ in a cost-saving strategy rooted in massive, inflexible, centralizedoperations. Businesses must get better at quantifying these opportunities in a way that isconvincing to decision makers, but at the same time decision-makers need to get morecomfortable with ―soft‖ vs. ―hard‖ costs as a fuel for decision input. For senior retailexecutives, the ability to balance tomorrow‘s opportunity versus today‘s reality in thisvery specific way will be an important criterion for success.Part II: Lowest potential unit cost. For the manufacturing part of the value chain,the cost vs. flexibility argument will also be critical. Channel volume planning needs to bean integral part of manufacturer capacity development and there needs to be a realunderstanding of how those channels may require different levels and types of item, casepack, or delivery. Instead of building a model and then hoping the retail environmentresponds to it, manufacturers would be far better served mapping out what potentialvolume will look like ten years out, and then assessing whether they have the rightinfrastructure to supply that environment, at the lowest unit cost, across all of thedifferent types of units they will need.Part III: Holistic productivity management. Over the past several decades, retailhad a set of operating measures that were both relatively simple and that workedrelatively well: comp-store sales, gross margin return on inventory (GMROI), and salesper square foot. Most good retailers are fluent to some degree in productivity metrics thatdrive both strategy and operational behavior. An omnichannel world will put pressure onall of these metrics, rendering them potentially less helpful. For instance, too much focuson sales per physical asset will be overly cautious about digital/mobile engagement andcertainly miss more than a few tricks. Additionally, backward-looking metrics in generalbecome challenging when your world is fundamentally, not incrementally, changing. Theability to model forward-looking behavior will become necessary, particularly for retailerstrying to understand what to sell in store versus outside the store. Successful retailers willbecome experts at predictive shelf modeling and predictive space design, linking togetherstore/shelf designers, inventory managers, and merchants to design more holisticsolutions.Part IV: Doing the right work. This report has presented ideas to consider betweennow and 2020. With limited resources and the inability to pursue all suggestedefficiencies, companies should focus on these two critical components and to make sureresources are available to realize growth and opportunity. Focus on eliminating unproductive work. Aim to overcome bureaucratic inertia to avoid wasting resources on work that should no longer be done. Envision new ways of doing new things. The new efficiency is not about doing the old work better, it‘s about doing new work, approaching problems differently and re-engineering huge pieces of the value chain to get to a fundamentally different cost structure.Retailing 2020: Winning in a polarized world Page 43PwC/Kantar Retail

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In summaryWe have outlined the "retail realities" we envision that could potentially have an impacton retailers and their operations as we approach 2020. Success will likely be shaped byseveral factors, weaved together in a flexible, scalable, and agile model. The winningretailers will have a superior understanding of their consumer, considering income anddemographic fragmentation, as well as behaviors, and will have the inert ability to analyzeshopper data and extract valuable information. They will leverage technology shifts totheir advantage and turn business intelligence and data into actionable insight to growand benefit the business. They will integrate these insights into the demand chain andinto enhanced customer service models. They will have an enhanced understanding ofmarket fragments and patterns of growth and will be able to operate and manage"glocally"- on a global scale with attention to local needs. Leading retailers will addressthe challenges to their economic models and adapt their frame of mind on store formats,employment models and return on investment. The successful 2020 retailer will alsobuild a true omnichannel operation that allows customers to interface through anychannel of their preference on a 24/7 basis, anywhere at any time. By embodying theseand other success factors, retailers and suppliers alike can manage the complexity anddiversity of retailing in 2020.Retailing 2020: Winning in a polarized world Page 44PwC/Kantar Retail

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About the PwC NetworkPwC firms help organizations and individuals create the value they‘re looking for. We‘re anetwork of firms in 158 countries with close to 169,000 people who are committed todelivering quality in assurance, tax and advisory services. Tell us what matters to you andfind out more by visiting us at www.pwc.com.This document is for general information purposes only, and should not be used as asubstitute for consultation with professional advisors.About Kantar RetailKantar Retail (www.kantarretail.com) is the world‘s leading shopper and retailinsights and consulting business and is part of the Kantar Group of WPP. The companyworks with leading branded manufacturers and retailers to help them transform thepurchase behavior of consumers, shoppers and retailers through the use of retail insights,consulting, analytics and organizational development services. Kantar Retail tracks andforecasts over 1000 retailers globally, has purchase data on over 200m shoppers andamong its market-leading reports are the annual PoweRanking survey (USA and China)and Industry Shopper Study Across Retailers. Kantar Retail works with over 400 clientsand has 20 offices in 15 markets around the globe.Retailing 2020: Winning in a polarized world Page 44PwC/Kantar Retail